Slower smartphone growth hits ARM shares

ARM shares are taking a beating as investors worry about slowing growth in the smartphone market.

Shares in ARM Holdings fell by nearly 5% Tuesday as slower growth in smartphone sales led to weaker-than-expected demand for its chips last quarter.

The British tech company has profited handsomely from designing chips used by smartphone makers such as Apple(AAPL) and Samsung(SSNLF). High-end devices, which use more chips, create more revenue for the company.

But ARM's(ARMH) latest quarterly results show its revenue is not growing as quickly as expected because the market for smartphones is gradually becoming saturated.

Shares in ARM have soared by more than 800% over the past five years as investors rode the smartphone trend, impressed by the company's consistent double-digit revenue growth. Those gains have left the stock looking pricey.

"Investors have lots of profits to take in this stock -- and investors right now are very focused on profit-taking," said Matthew Beesley, head of global equity at Henderson Global Investors, who does not own shares in the company.

ARM generates revenue by licensing its chip designs and receiving royalty payments every time a chip is created using its intellectual property.

Royalty revenue was up 7% in the fourth quarter compared to the same period last year, weaker than analysts were expecting.

But licensing fees rose by 26% as the company signed new deals with telecoms operators, software companies and equipment manufacturers.

"We see this as an indication of the ongoing diversity of ARM's future royalty base," said analyst Andrew Dunn from RBC Capital Markets.

ARM is one of the worst performing stocks on the CNNMoney Tech30 index. Its shares have dropped by roughly 20% so far this year.